FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to ______________
Commission file number 0-7390
Aero Systems Engineering, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-0913117
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-227-7515
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __X__ No ____
As of June 30, 1996, 2,551,717 shares of common stock, par value $.20
per share, were outstanding.
AERO SYSTEMS ENGINEERING, INC.
(Subsidary of Celsius, Inc.)
Form 10-Q
Quarter Ended June 30, 1996
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operation 8
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
PART I - FINANCIAL INFORMATION
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1996 1995
----------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash $ 41 $ 141
Accounts Receivable, net 3,965 7,374
Costs and Estimated Earnings in
Excess of Billings on
Uncompleted Contracts 7,372 7,678
Inventories
Materials and Supplies 834 780
Projects in Process 423 631
Prepaid Expenses 0 183
Deferred Income Tax Benefit 502 502
Income Tax Receivable 103 103
------- -------
Total Current Assets 13,240 17,392
LONG TERM ASSETS
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,005 5,577
Wind Tunnels & Instrumentation 2,595 2,270
Building Improvements 1,294 1,255
------- -------
13,405 12,613
Less Accumulated Depreciation 6,929 6,431
------- -------
Property, Plant, and Equipment, net 6,476 6,182
Investments 465 465
Non-Compete Agreement, net 110 137
------- -------
Total Long Term Assets 7,051 6,784
Total Assets $20,291 $24,176
======= =======
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
LIABILITIES 1996 1995
----------- ----------------------------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 90 $ 27
Current Maturites of Long-Term
Debt to Affiliated Companies 800 800
Notes Payable - Banks 4,350 4,930
Notes Payable 0 127
Accounts Payable:
Trade 1,162 2,878
Affiliated companies 215 118
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,318 1,972
Accrued Warranty and Losses 643 702
Accrued Salaries and Wages 847 765
Income Taxes Payable 2 3
Other Accrued Liabilities 1,508 1,454
------- -------
Total Current Liabilities 10,935 13,776
OTHER LIABILITIES
Deferred Revenue 465 465
Deferred Income Taxes 502 502
Long Term Debt to Affiliated Company,
Less Current Maturities 1,600 2,000
Capital Lease Obligations,
Less Current Maturities 470 255
STOCKHOLDERS' EQUITY
Common Stock - Authorized 3,000,000
Shares of $.20 Par Value; Issued
2,551,717 on June 30, 1996
and December 31, 1995 510 510
Additional Contributed Capital 517 517
Retained Earnings 5,292 6,151
------- -------
Total Stockholders' Equity 6,319 7,178
------- -------
Total Liabilities and
Stockholders' Equity $20,291 $24,176
======= =======
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
<TABLE>
<CAPTION>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
----------------------- -----------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 5,196 $ 4,653 $ 11,123 $ 10,435
Cost of Earned Revenue 4,065 3,552 8,234 7,830
-------- -------- -------- --------
Gross Profit 1,131 1,101 2,889 2,605
Operating Expenses 1,780 1,511 3,324 2,825
-------- -------- -------- --------
Operating Profit(Loss) (649) (410) (435) (220)
Other Income (Expense)
Interest Income 2 34 4 42
Interest Expense (178) (216) (374) (412)
Other (45) (2) (54) (1)
-------- -------- -------- --------
(221) (184) (424) (371)
-------- -------- -------- --------
(Loss) Before Income Taxes (870) (594) (859) (591)
Income Tax Expense (Benefit) -- -- -- --
-------- -------- -------- --------
Net (Loss) $ (870) $ (594) $ (859) $ (591)
======== ======== ======== ========
NET LOSS PER SHARE $ (0.34) $ (0.23) $ (0.34) $ (0.23)
======== ======== ======== ========
Dividends per Share None None None None
</TABLE>
<TABLE>
<CAPTION>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Six Months Six Months
Ended Ended
June 30 1996 June 30 1995
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (859) $ (591)
Adjustment to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and Amortization 525 513
(Increase) Decrease in Assets:
Accounts Receivable 3,409 (352)
Cost and Estimated Earnings
in Excess of Billing on
Uncompleted Contracts 306 (998)
Inventories 154 (462)
Prepaid Expenses 183 154
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,543) (1,164)
Billings in Excess of Costs and
Estimated Earnings on
Uncompleted Contracts (654) 871
------- -------
Net Cash Provided (Used) by
Operating Activities 1,521 (2,029)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (478) (227)
Payment Received on Note Receivable -- 77
------- -------
Net Cash Used in Investing Activities (478) (150)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of
Credit Agreement (580) 2,293
Payment of Note Payable (127)
Principal Payments under Capital
Lease Obligations (36) (14)
Principal Payments on Borrowings
From Affiliates (400) (400)
------- -------
Net Cash Provided (Used) by
Financing Activities (1,143) 1,879
------- -------
NET CHANGE IN CASH (100) (300)
CASH AT BEGINNING OF YEAR 141 310
------- -------
CASH AT END OF QUARTER $ 41 $ 10
======= =======
</TABLE>
AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(Subsidiary of Celsius, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting solely of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ending June 30,
1996 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December
31, 1995.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
June 30 1996 June 30 1995
------------ ------------
Costs Incurred on Uncompleted
Contracts $31,150 $30,530
Estimated Earnings Thereon 8,714 10,309
------- -------
Total Earned Revenue on
Uncompleted Contracts 39,864 40,839
Less Billings Applicable thereto 33,810 34,737
------- -------
$ 6,054 $ 6,102
======= =======
Included in Accompanying Balance
Sheet Under Following Captions:
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts $ 7,372 $ 7,721
Billings in Excess of Costs
and Estimated Earnings on
Uncompleted Contracts 1,318 1,619
------- -------
$ 6,054 $ 6,102
======= =======
NOTE C - CONTINGENCIES AND COMMITMENT
Letter of Credit
Standby letters of credit totaling $6,020,792 were outstanding
on June 30, 1996 to various customers in exchange for down
payments or warranty performance bonds.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Second Quarter 1996 (All dollar amounts are in thousands)
Worldwide revenue for the second quarter 1996 totaled $ 5,196 which was a 12%
increase from $ 4,653 in the second quarter of last year. Net loss after taxes
was $ 870 which was an increase of $ 276 as compared to the second quarter loss
of last year. The revenue increase was attributable primarily to a small
increase in business activity in the worldwide airline industry, research
institutions, and government agencies. The loss was attributed to the
cancellation of a major contract by a U. S. Governmental agency (NASA) and that
additional new orders have not been received during the second quarter.
Backlog of orders was $ 13,542 as compared with $ 30,200 at the end of the
second quarter of the previous year. This 55% decrease is related to a large
wind tunnel contract which was canceled in February 1996 by NASA, and that
additional new orders have not materialized during 1996.
The cost of earned revenue for the second quarter, which includes manufacturing
and engineering costs, was 78% as compared to 76% during the same period of last
year. The increase is a result of lower project margins and additional costs
which were incurred to complete projects.
The Company recognizes revenue using the percentage of completion method for its
long-term contracts. Estimates of revenues earned and expenses to be incurred to
complete the contracts are made in conjunction with the preparation of the
quarterly financial statements. However, final determination of the
profitability of the contracts are subject to settlement of any final claims
which may develop at the time the completed contract is accepted by the customer
as well as risks inherent in estimates which are made during the course of the
contract work.
Selling, general and administrative expenses of $ 1,780 was 34% of revenues
during the second quarter as compared to $ 1,511 and 32% during the same period
of last year. This increase of $ 269 or 18% was due to a higher level of
marketing activity and contract proposal preparations.
Research and development expenses were $ 129 during the second quarter as
compared to $ 273 in the same period in 1995. This decrease of $ 144 or 53%
reflects that during 1995, a higher level of expenditures were necessary to
develop the new ASE2000 data acquisition computer system. In 1996, R&D has been
and will be used for additional enhancements to the ASE2000 in order to maintain
a leadership role in the marketplace.
Capital expenditures were $ 478 which was a $ 251 increase as compared to the
same period of last year. In addition, the Company entered into several
capitalized leases during the quarter aggregating $314. It is expected that for
1996, additional capital expenditures will be held to a minimum. In 1996,
capital resources were used to further enhance the AeroTest Laboratory
capabilities.
Interest expense of $ 178 was incurred during the quarter as compared to $ 216
from the same period in the prior year. The average rate of interest on the
borrowings has increased but the average amount of borrowings outstanding has
been lower than in the second quarter of 1995.
Accounts receivable at the end of the second quarter was $ 3,965 as compared
with the year end balance of $ 7,374. This decrease of $ 3,409 was the result of
collecting several large receivables plus collecting many of the smaller
outstanding receivables.
Accounts payable and accrued expenses at the end of the second quarter decreased
$ 1,543 or 26% as compared to the year end balance. This was primarily due to
(1) reduced amounts owed to vendors on current projects, and (2) payments made
for materials and services ordered in late 1995.
Notes payable to banks decreased $ 580 or 12% as compared with the year end
balance. This reduction is related to the increased collections of accounts
receivable, which allowed the company to reduce amounts due to banks.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the second quarter decreased $ 306 or 4%, to $ 7,372 as compared with
the year end balance. The Company recognizes profit on long-term projects on the
percentage of completion basis, which permits earned revenue to be recognized
prior to the time that progress payments are billed. When this occurs, amounts
are added to this asset account for the recognition of earned revenue prior to
the billing of progress payments. The decrease since year end is due to
completion of contracts and final billings related to the completed contracts.
Billings are a function of contract terms and do not necessarily relate to the
percentage of completion of a project.
The company operates on a global basis and during an average year, generates 50%
- - 65% of its revenues from international customers. This trend has continued for
the last five years as foreign airlines and government agencies purchase
products that ASE designs and produces. Most of the Company's contracts are
denominated in U.S. dollars, however a few of them are denominated in the
customer's local currency. Therefore, the company has entered into several
foreign exchange forward contracts having maturities within the next eighteen
months. The face amounts represent U.S. dollar equivalents of a non-U.S. dollar
denominated forward contract. The amounts at risk are not material and the
company has the financial ability to generate cash flows to offset the expected
gain or losses when the contracts mature.
The Company has consistently relied upon bank credit lines during recent years
as a source of its working capital resources and liquidity. Funds under these
lines of credit are actually provided by Celsius, Inc. and ultimately are
guaranteed by AB Celsius Finance, the financial division of Celsius AB, a
Swedish corporation. Celsius, Inc., a United States corporation, is a
wholly-owned subsidiary of Celsius Invest which is wholly-owned by Celsius AB.
Celsius, Inc. owns approximately 80% of the outstanding shares of common stock
of ASE. A first security interest in all assets of ASE has been granted to
Celsius AB and a fee is paid through Celsius, Inc.
ASE currently has bank lines of credit which enable it to borrow up to a total
of $6,000. At June 30, 1996 $ 4,350 was used and $1,650 was available. The
Company believes that these bank lines of credit, along with cash flows from
continuing operations, are adequate to support the Company's cash needs for the
immediate future.
Highly competitive market conditions have minimized the effect of inflation on
both the contract prices and the cost of the Company's purchased materials.
Productivity improvements and cost reduction programs have largely offset the
effect of inflation on other costs and expenses.
Looking ahead throughout the remainder of 1996, the marketplace has been weak
during the first and second quarters, however several commercial aircraft test
projects are expected to be contracted during the latter half of 1996 as
international airlines invest in facilities to support new aircraft purchases.
ASE has also continued its ongoing productivity and process improvements in
order to lower operating costs. ASE has initiated the process of becoming ISO
9001 certified and the majority of this effort will be concluded in the current
year.
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius, Inc.)
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
ended March 31,1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1996
---------------------------------------
Charles L. Rooks
(Chief Financial and Accounting Officer)
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<NAME> CHARLES L. ROOKS
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 41
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<RECEIVABLES> 3,965
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0
0
<COMMON> 510
<OTHER-SE> 517
<TOTAL-LIABILITY-AND-EQUITY> 20,291
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<CGS> 8,234
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